Words Left Unsaid: The Companies Act of 2013

Much of the recent buzz about corporate social responsibility (CSR) in South Asia has focused on India’s groundbreaking Companies Act which encourages charitable spending by the country’s top corporations. Countries as diverse as the Philippines, Thailand, Italy, and Canada have policies to encourage responsible business practices. But India became the first country to mandate reporting on corporate social spending by passing the new Companies Act 2013.

However exciting the new legislation, it is essential to critically assess some of the questions left unanswered by the Act about CSR.

Whose money is it? Even though the Companies Act of 2013 was enacted with the interest of social development in mind, the legislation raises questions about the Indian government’s encroachment into capitalism. At the heart of corporate disgruntlement regarding the Act is the belief that in a free economy, businesses should be able to spend their profits as they see fit. The Government of India has already set historical precedents of a ‘cess’, specially earmarked tax designed to raise money for a particular department or cause, such as the 3% education cess set on all income. Would it not be equally effective to simply increase taxes on the same top companies by 2% and allow the government to manage earmarked incoming funds by funneling them to social development departments?

Two factors are relatively unique to India and may have influenced the Companies Act’s format of directed spending rather than increased taxes. The first is that despite relatively low government social spending, India is still considered to be a welfare state, not a purely capitalist society. Unlike countries like the United States, in which the government takes a largely hands-off approach on private sector regulation, in India there remains room for debate about corporate autonomy.

The second factor is the emphasis on keeping the new flow of private CSR funds away from the government and its existing initiatives. Dr. Bhaskar Chatterjee, Director General and CEO of the Indian Institute of Corporate Affairs that helped frame the Companies Act, has explicitly encouraged the private sector to avoid simply channeling funds towards government activities such as the Prime Minister’s National Relief Fund, even if that route would be easier. These instructions derive from an opinion that individual corporate decisions about how and where to invest in social development projects may prove to be more effective and innovative than current government practices in aiding marginalized populations.

What counts as CSR? Businessmen, policymakers, and think tanks alike have disputed the exact definition of CSR for years, and each sector seems to hold a different perspective. In the Companies Act, the Indian government attempts to lay forth a new definition of CSR, exclusively measured by numerical spending in a set of 10 development categories prescribed by the Act’s Schedule VII. Despite the attempts to create a definitive set of guidelines, much clarification is needed on what counts as CSR in the Act and whether the Act’s guidelines are legitimate. For example, catchall clauses such as “such other matters as may be prescribed” leave ambiguity as to whether the socially-driven activity of religious organizations or political participation campaigns may be supported by corporates under the Act. Additionally, the Act noticeably avoids supporting good internal business practices, such as business ethics, worker rights, or environmental sustainability, raising concerns that these issues will be overlooked in an attempt to donate to external development projects that may have a minimal long-term impact. Avoiding these issues may result in superficial company commitments to CSR, which implies that the Companies Act may actually be counterproductive in advancing the dialogue around CSR.

Why is there such a trust deficit between nonprofits and corporates? The inability of the different sectors to agree upon a common definition of CSR is part of a greater problem of communication and mistrust that surrounds CSR activities. A deficit of trust between corporates and nonprofits has long been recognized as a barrier to expanded private-NGO partnerships, and it is essential to understand why this deficit still exists and where misunderstandings lie.

One barrier to mutual trust is the fact that every sector has a different motive for its work, which often inhibits complete understanding of the others. Although the grossest stereotypes – NGOs want to ‘serve’, the private sector to ‘make a profit’, and the government to ‘regulate’ – may seem extreme, at the end of the day, they do explain the drivers of action for many members of society. When all three sectors are required to collaborate, as is now the case with CSR in India, frustrations are quick to arise. Open dialogues are required to flesh out these conflicts before CSR can be further pursued in a trustful atmosphere.

A second barrier is the different language used to describe work by the different sectors, with discrepancies in rhetoric affecting the effectiveness of CSR activities. Connotations of the language surrounding CSR can affect the success of private-public-NGO partnerships. The working CSR relationship is perceived in contrasting ways by the different sectors; for example, NGOs want a ‘partnership’ that connotes equality in position, whereas corporates interested in CSR prefer to frame themselves as a benevolent ‘donor’. This difference in rhetoric and connoted priorities translates into different opinions on other features such as indicators, making assessment of the impact of CSR activities difficult.

The greatest barrier to CSR activity remains a perceived lack of transparency and financial accountability on the part of the NGO recipients. As late as in 2013, 60% of private donors received no regular communications about the impact of their donations, even though 26% of the donors stated that would be ready to give more money if reporting by the nonprofit were improved. Some measures such as regular monitoring reports under the Companies Act, the Securities and Exchange Board of India, and other organizations will hopefully address this gap, while a set of NGO accrediting agencies such as the Credibility Alliance and Give India are part of a larger campaign to improve transparency and accountability from the nonprofit sector. This will be particularly important for the future of CSR relationships since it allows distinctions and educated investments to be made among the more than 3 million registered NGOs in India.

Thus it is clear that despite the excitement surrounding the promulgation of the Companies Act, it is quite clear that there are many conversations remaining on the role of CSR in India’s social development. The questions raised in this article are only a few of those that must be answered before effective corporate-NGO partnerships can be developed and before effective and sustainable policies can be implemented. In the end, the Companies Act is only one step in the process towards a strong CSR dialogue in India and policymakers and businessmen alike must build on its momentum to move forward.

About the author

CSR VISION is India’s ( probably world’s ) first monthly magazine in print devoted to CSR and Sustainable Development for bringing together all stakeholders of SUSTAINABLE DEVELOPMENT at a global and local levels and act as a platform for promoting strategic CSR and sustainable development practices through dissemination of information and knowledge.